The Rise of Multi-Family Development: A Strategic Shift in Canada's Residential Development Landscape
September 6, 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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An adequate supply of rental housing is crucial for restoring affordability in Canada. CMHC estimates that achieving this goal would require an investment of at least $1 trillion[1]. In this context, the private sector plays a vital role. However, in recent years, an uncertain economic environment—marked by rising interest rates, construction costs, and development fees—has challenged the financial viability of many planned rental projects. These restrictive financial conditions have curtailed private investment in new purpose-built rental housing, leading to a reduction in planned developments and exacerbating the affordability crisis.
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Figure 1.0
Sources: Statistics Canada, Table 34-10-0066-01 Building permits, by type of structure and type of work (x 1,000); Statistics Canada, Table 18-10-0135-01 Building construction price indexes, by type of building, inactive; Statistics Canada, Table 18-10-0256-01 Consumer Price Index (CPI) statistics, measures of core inflation and other related statistics - Bank of Canada definitions
The real estate landscape is experiencing a significant shift, with multi-family development emerging as a key focus in the coming years. A convergence of factors—declining condominium prices, reduced land costs, favourable policy changes, and demographic shifts—is fuelling this trend. Developers, investors, and policymakers are increasingly recognizing the benefits of multi-family units over traditional condominiums, especially in today's volatile economic environment. This article delves into the reasons behind the rising prominence of multi-family development and how current market trends, economic policies, and demographic changes are shaping its future.
Declining Condominium Market and Falling Land Prices
The condominium market, once the cornerstone of urban development, is now facing significant challenges. Recent findings from the Altus Sentiment Survey Q2 2024 reveal a sharp increase in developer confidence for new rental projects[2]. Factors such as rising interest rates, escalating construction costs, and oversupply in certain markets have collectively dampened enthusiasm for condo development. This shift is reflected in the falling condo prices, which in turn, have led to a marked reduction in condo starts.
Declining Condominium Market and Falling Land Prices
The condominium market, once the cornerstone of urban development, is now facing significant challenges. Recent findings from the Altus Sentiment Survey Q2 2024 reveal a sharp increase in developer confidence for new rental projects[2]. Factors such as rising interest rates, escalating construction costs, and oversupply in certain markets have collectively dampened enthusiasm for condo development. This shift is reflected in the falling condo prices, which in turn, have led to a marked reduction in condo starts.
Figure 2.0
Source: Altus Group's Investment Trends Survey
Source : CREA
As condo prices have dropped, land prices have followed suit, particularly in urban centres where high-rise condominiums previously drove land values. The market for high-density lands is experiencing a downward trend[3]. This decrease in land costs is making multi-family developments, especially purpose-built rentals, increasingly financially viable. Developers can now acquire land at a lower cost, enhancing the overall feasibility of multi-family projects.
A critical metric, the land-to-revenue ratio (which estimates the relationship between land value and new condominium prices) in the Greater Toronto Area (GTA), has shown a consistent decline over the past five years, dropping from a high of 11.9% in 2018.
A critical metric, the land-to-revenue ratio (which estimates the relationship between land value and new condominium prices) in the Greater Toronto Area (GTA), has shown a consistent decline over the past five years, dropping from a high of 11.9% in 2018.
Average high-density price per-buildable-sf for GTA
Figure 4.0
Figure 5.0
The Surge in Multi-Family Development
In contrast to the faltering condo market, multi-family development is experiencing robust growth, driven by several key factors:
1 .Economic Viability and Policy Support
Multi-family units, especially purpose-built rentals, provide a more stable and predictable income stream compared to condominiums, making them increasingly attractive to developers and investors. Recognizing the urgent need for affordable housing, the federal government has implemented several policies to support multi-family development. One significant measure was the removal of the Goods and Services Tax (GST) on new qualifying rental housing construction in September 2023. This tax relief has substantially reduced the development costs, enhancing the financial feasibility of these projects.
The Canada Mortgage and Housing Corporation (CMHC) has also been instrumental in driving the growth of multi-family developments. The CMHC’s Apartment Construction Loan Program (ACLP), which offers low-cost loans to eligible developers, has been pivotal in promoting multi-family construction. The program's expansion in 2023, with an additional $15 billion in funding, is projected to support the construction of 101,000 new rental homes by 2031-32[4].
Moreover, CMHC introduced a new multi-unit mortgage loan insurance product in March 2022, which incentivizes new rental construction by offering insurance based on a points system that rewards affordability, energy efficiency, and accessibility.
In a further effort to boost rental housing, the annual limit for Canada Mortgage Bonds (CMBs), which are CMHC-guaranteed and sold to investors to fund residential mortgage financing, was increased from $40 billion to $60 billion in September 2023. This measure is expected to facilitate the construction of up to 30,000 additional rental apartments annually.
These robust policy supports have made multi-family developments a more attractive and viable option for developers seeking long-term stability and lower financial risk in an increasingly volatile market.
In contrast to the faltering condo market, multi-family development is experiencing robust growth, driven by several key factors:
1 .Economic Viability and Policy Support
Multi-family units, especially purpose-built rentals, provide a more stable and predictable income stream compared to condominiums, making them increasingly attractive to developers and investors. Recognizing the urgent need for affordable housing, the federal government has implemented several policies to support multi-family development. One significant measure was the removal of the Goods and Services Tax (GST) on new qualifying rental housing construction in September 2023. This tax relief has substantially reduced the development costs, enhancing the financial feasibility of these projects.
The Canada Mortgage and Housing Corporation (CMHC) has also been instrumental in driving the growth of multi-family developments. The CMHC’s Apartment Construction Loan Program (ACLP), which offers low-cost loans to eligible developers, has been pivotal in promoting multi-family construction. The program's expansion in 2023, with an additional $15 billion in funding, is projected to support the construction of 101,000 new rental homes by 2031-32[4].
Moreover, CMHC introduced a new multi-unit mortgage loan insurance product in March 2022, which incentivizes new rental construction by offering insurance based on a points system that rewards affordability, energy efficiency, and accessibility.
In a further effort to boost rental housing, the annual limit for Canada Mortgage Bonds (CMBs), which are CMHC-guaranteed and sold to investors to fund residential mortgage financing, was increased from $40 billion to $60 billion in September 2023. This measure is expected to facilitate the construction of up to 30,000 additional rental apartments annually.
These robust policy supports have made multi-family developments a more attractive and viable option for developers seeking long-term stability and lower financial risk in an increasingly volatile market.
Table 1: Financial Support for Multi-Family vs. Condomimium Development
2. Demographic Shifts and Urbanization
The increasing demand for rental housing is closely linked to demographic shifts and urbanization trends. Younger generations, especially millennials and Gen Z, are increasingly favouring rentals over homeownership due to the flexibility it provides, and the high costs associated with buying a home. These demographics are significantly driving the demand for rental units, particularly in urban centers. Gen Z, in particular, show a strong preference for urban living: they seek vibrant, walkable neighbourhoods that offer a wide array of amenities within easy reach. They gravitate towards mixed-use developments where residential spaces blend seamlessly with retail, dining, and entertainment options. For Gen Z, an ideal neighbourhood is a dynamic hub of activity and connection.
Between 2016 and 2021, Gen Z (ages 9 to 24) grew by 6.4%, marking the second-fastest growth rate among all generations[5]. In 2023, this age group experienced higher growth than other age groups in most provinces, with Alberta seeing particularly robust growth—more than twice the national average.
As a result, the rental demand has grown unabated. According to a CMHC report, national vacancy rates dropped to a mere 1.5% in 2023, the lowest level since 1998[6]. In most major markets across the country, strong rental demand has continued to outpace supply, resulting in tighter markets and decreased affordability. Rental markets remain particularly constrained in Canada’s major cities.
The increasing demand for rental housing is closely linked to demographic shifts and urbanization trends. Younger generations, especially millennials and Gen Z, are increasingly favouring rentals over homeownership due to the flexibility it provides, and the high costs associated with buying a home. These demographics are significantly driving the demand for rental units, particularly in urban centers. Gen Z, in particular, show a strong preference for urban living: they seek vibrant, walkable neighbourhoods that offer a wide array of amenities within easy reach. They gravitate towards mixed-use developments where residential spaces blend seamlessly with retail, dining, and entertainment options. For Gen Z, an ideal neighbourhood is a dynamic hub of activity and connection.
Between 2016 and 2021, Gen Z (ages 9 to 24) grew by 6.4%, marking the second-fastest growth rate among all generations[5]. In 2023, this age group experienced higher growth than other age groups in most provinces, with Alberta seeing particularly robust growth—more than twice the national average.
As a result, the rental demand has grown unabated. According to a CMHC report, national vacancy rates dropped to a mere 1.5% in 2023, the lowest level since 1998[6]. In most major markets across the country, strong rental demand has continued to outpace supply, resulting in tighter markets and decreased affordability. Rental markets remain particularly constrained in Canada’s major cities.
Figure 6.0
Source: CMHC Rental market Report
Most markets experienced higher rent increases, aligning with the observed decline in vacancy rates. In 2023, the average rent for two-bedroom purpose-built apartments surged by 8.0%, a significant jump from the 5.6% increase seen in the previous year. This marks a new high, far exceeding the 1990-2022 average growth rate of 2.8%. Rent growth outpaced both inflation (4.7%) and wage growth (5%), signalling a decline in affordability. Unsurprisingly, Calgary and Edmonton witnessed the most pronounced acceleration in rent growth among the largest markets.
Figure 7.0
Source: CMHC Rental market Report
With such low vacancy rates, the demand for rental units is expected to remain strong, further fuelling the growth of multi-family developments.
3. Market Trends and Developer Preferences
In 2023, purpose-built rental construction in the six largest CMAs reached record levels, significantly boosting overall housing starts. Over recent years, purpose-built rentals have accounted for an increasingly larger share of new apartments, averaging 42% of all starts in 2023. Edmonton led the group with an impressive 80% share, the highest among the six CMAs and far above its 10-year average. In Toronto, where condominium apartments have traditionally dominated, the rental share rose to over a quarter of new starts.
3. Market Trends and Developer Preferences
In 2023, purpose-built rental construction in the six largest CMAs reached record levels, significantly boosting overall housing starts. Over recent years, purpose-built rentals have accounted for an increasingly larger share of new apartments, averaging 42% of all starts in 2023. Edmonton led the group with an impressive 80% share, the highest among the six CMAs and far above its 10-year average. In Toronto, where condominium apartments have traditionally dominated, the rental share rose to over a quarter of new starts.
Source: CMHC Rental market Report
According to the CMHC Rental Market Report, one-third of the 60,000 units under construction in Vancouver at the end of 2023 were purpose-built rentals—the highest proportion of rental units under construction in the past 30 years[7]. This shift towards multi-family development is also evident in other markets. The 2024 Calgary Commercial Real Estate Trends report revealed that, for the first time, purpose-built rental apartment starts outpaced condo starts in 2023. This reflects a broader trend across Canada, where developers are increasingly prioritizing rental housing as a more secure and profitable investment.
The persistent demand backlog for rental units ensures that new multi-family developments are quickly absorbed into the market, providing developers with a steady and reliable income stream.
The Future Outlook
The rise of multi-family development is a strategic response to the evolving dynamics of the housing market. As condominium prices decline and new condos start to diminish, developers are increasingly turning to multi-family units as a more stable and lucrative investment. This shift is fuelled by government policies, demographic changes, and growing market demand, positioning multi-family developments to play a dominant role in the future of urban housing. This trend underscores a broader recognition of the need for affordable, flexible housing solutions that cater to the diverse and evolving needs of urban populations, making multi-family units the cornerstone of future real estate development.
However, sustained growth in this sector will require comprehensive and coordinated policy support. Short-term responses to market conditions could exacerbate long-term structural housing supply challenges. During the ‘Peak 1970s’ period, rental construction was bolstered by federal tax subsidies and the Canada Rental Supply Plan. A similarly coordinated program design is crucial today to meet the increasing demand for rental housing.
Supportive financing programs are essential. While condominium projects typically benefit from an 80%-20% debt-to-equity ratio due to their deposit structure, rental construction demands significantly more equity, with debt ratios often between 60%-70% and equity requirements of 30%-40%. These ratios can vary depending on provisions in loan documents or programs under the National Housing Strategy (NHS). According to a survey conducted by EY , over two-thirds of respondents have explored or used Canada Mortgage and Housing Corporation (CMHC) programs. The survey results highlight CMHC’s role as an innovative and helpful partner, further strengthening the case for expanding CMHC’s role in increasing rental housing supply.
A coordinated plan across all levels of government is imperative. A federal directive could empower municipalities and provinces to address the specific challenges of constructing purpose-built rental housing. This could include working with local governments on solutions to finance upfront infrastructure, which would accelerate development and reduce initial costs for builders. Additionally, governments could assess options to waive development charges, extend PST/GST exemption, provide financing, etc. Leveraging land use policy to prioritize or designate areas for rental housing would also be a key strategy in addressing the supply-demand imbalance.
Restructuring rent caps could also play a crucial role. Provincial governments should evaluate the potential benefits of relaxing rent caps to encourage greater rental housing development. As the supply of rental units increases, natural market forces would help stabilize rents, ensuring they remain aligned with demand.
At REIC, we believe that a collaborative effort from all stakeholders is essential to building a substantial inventory of rental accommodations that can help alleviate the housing crisis. The role of property managers in efficiently managing these units and ensuring their profitability is equally crucial. REIC members, recognized for their professionalism and expertise, uphold the highest standards through our designation programs, providing the industry with a qualified talent pool to maintain and manage a thriving rental asset portfolio.
The persistent demand backlog for rental units ensures that new multi-family developments are quickly absorbed into the market, providing developers with a steady and reliable income stream.
The Future Outlook
The rise of multi-family development is a strategic response to the evolving dynamics of the housing market. As condominium prices decline and new condos start to diminish, developers are increasingly turning to multi-family units as a more stable and lucrative investment. This shift is fuelled by government policies, demographic changes, and growing market demand, positioning multi-family developments to play a dominant role in the future of urban housing. This trend underscores a broader recognition of the need for affordable, flexible housing solutions that cater to the diverse and evolving needs of urban populations, making multi-family units the cornerstone of future real estate development.
However, sustained growth in this sector will require comprehensive and coordinated policy support. Short-term responses to market conditions could exacerbate long-term structural housing supply challenges. During the ‘Peak 1970s’ period, rental construction was bolstered by federal tax subsidies and the Canada Rental Supply Plan. A similarly coordinated program design is crucial today to meet the increasing demand for rental housing.
Supportive financing programs are essential. While condominium projects typically benefit from an 80%-20% debt-to-equity ratio due to their deposit structure, rental construction demands significantly more equity, with debt ratios often between 60%-70% and equity requirements of 30%-40%. These ratios can vary depending on provisions in loan documents or programs under the National Housing Strategy (NHS). According to a survey conducted by EY , over two-thirds of respondents have explored or used Canada Mortgage and Housing Corporation (CMHC) programs. The survey results highlight CMHC’s role as an innovative and helpful partner, further strengthening the case for expanding CMHC’s role in increasing rental housing supply.
A coordinated plan across all levels of government is imperative. A federal directive could empower municipalities and provinces to address the specific challenges of constructing purpose-built rental housing. This could include working with local governments on solutions to finance upfront infrastructure, which would accelerate development and reduce initial costs for builders. Additionally, governments could assess options to waive development charges, extend PST/GST exemption, provide financing, etc. Leveraging land use policy to prioritize or designate areas for rental housing would also be a key strategy in addressing the supply-demand imbalance.
Restructuring rent caps could also play a crucial role. Provincial governments should evaluate the potential benefits of relaxing rent caps to encourage greater rental housing development. As the supply of rental units increases, natural market forces would help stabilize rents, ensuring they remain aligned with demand.
At REIC, we believe that a collaborative effort from all stakeholders is essential to building a substantial inventory of rental accommodations that can help alleviate the housing crisis. The role of property managers in efficiently managing these units and ensuring their profitability is equally crucial. REIC members, recognized for their professionalism and expertise, uphold the highest standards through our designation programs, providing the industry with a qualified talent pool to maintain and manage a thriving rental asset portfolio.
[1] https://www.cmhc-schl.gc.ca/blog/2023/interest-rate-hikes-impact-rental-housing-construction-supply
[2] https://www.altusgroup.com/insights/canadian-cre-investment-trends/?utm_source=google&utm_medium=organic
[3] https://renx.ca/condo-high-density-land-sales-decline-greater-toronto-bullpen
[4] https://www.newswire.ca/news-releases/apartment-construction-sustains-housing-starts-in-canada-s-largest-cities-833777116.html#:~:text=The%202023%20Fall%20Economic%20Statement,rental%20homes%20by%202031%2D32
[5] https://www12.statcan.gc.ca/census-recensement/2021/as-sa/98-200-x/2021003/98-200-x2021003-eng.pdf
[6] https://www.cmhc-schl.gc.ca/media-newsroom/news-releases/2024/canadas-vacancy-rate-reaches-new-low-demand-outpaces-supply
[7] https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-supply-report/housing-supply-report-2024-spring-en.pdf?rev=065fba4d-7e86-44a0-bc5e-6acd5b6588ff&_gl=1*1whs2m9*_gcl_au*Nzg2Njg4OTkuMTcyMjgyNDMwNA..*_ga*MjA5NzQzNDc3My4xNzIyODI0MzA1*_ga_CY7T7RT5C4*MTcyNTQxNzk4Ni4xNS4xLjE3MjU0MTgxMzcuMzIuMC4w
[8] https://assets.cmhc-schl.gc.ca/sf/project/archive/research_6/2023-cmhc-economics-of-rental-supply-survey_ey-report.pdf?_gl=1*aiy8ht*_gcl_au*Nzg2Njg4OTkuMTcyMjgyNDMwNA..*_ga*MjA5NzQzNDc3My4xNzIyODI0MzA1*_ga_CY7T7RT5C4*MTcyNTQ2NzU0My4xNy4xLjE3MjU0Njc4NDguNTkuMC4w
[2] https://www.altusgroup.com/insights/canadian-cre-investment-trends/?utm_source=google&utm_medium=organic
[3] https://renx.ca/condo-high-density-land-sales-decline-greater-toronto-bullpen
[4] https://www.newswire.ca/news-releases/apartment-construction-sustains-housing-starts-in-canada-s-largest-cities-833777116.html#:~:text=The%202023%20Fall%20Economic%20Statement,rental%20homes%20by%202031%2D32
[5] https://www12.statcan.gc.ca/census-recensement/2021/as-sa/98-200-x/2021003/98-200-x2021003-eng.pdf
[6] https://www.cmhc-schl.gc.ca/media-newsroom/news-releases/2024/canadas-vacancy-rate-reaches-new-low-demand-outpaces-supply
[7] https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-supply-report/housing-supply-report-2024-spring-en.pdf?rev=065fba4d-7e86-44a0-bc5e-6acd5b6588ff&_gl=1*1whs2m9*_gcl_au*Nzg2Njg4OTkuMTcyMjgyNDMwNA..*_ga*MjA5NzQzNDc3My4xNzIyODI0MzA1*_ga_CY7T7RT5C4*MTcyNTQxNzk4Ni4xNS4xLjE3MjU0MTgxMzcuMzIuMC4w
[8] https://assets.cmhc-schl.gc.ca/sf/project/archive/research_6/2023-cmhc-economics-of-rental-supply-survey_ey-report.pdf?_gl=1*aiy8ht*_gcl_au*Nzg2Njg4OTkuMTcyMjgyNDMwNA..*_ga*MjA5NzQzNDc3My4xNzIyODI0MzA1*_ga_CY7T7RT5C4*MTcyNTQ2NzU0My4xNy4xLjE3MjU0Njc4NDguNTkuMC4w
An individual holding the CMOC( Certified Manager of Condominiums) designation is recognized as a professional who is extremely knowledgeable in all facets of condominium association management. Fulfilling the objectives of condominium owners while controlling operating costs and enhancing property values are just a few of the daily goals of those who hold this distinguished designation. Interested? Contact [email protected].
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]